Fiscal Councils Research Articles

Effects of the audit committee and the fiscal council on earnings quality in Brazil

ABSTRACT This study evaluates the effects of the audit committee and the fiscal council with their different characteristics on earnings quality in Brazil. The proxies of earnings quality used are: relevance of accounting information, timeliness, and conditional conservatism. The sample consists of Brazilian companies listed on the Brazilian Securities, Commodities, and Futures Exchange (BM&FBOVESPA) with annual liquidity above 0.001 within the period from 2010 to 2013. Data were collected from the database Comdinheiro and the Reference Forms of companies available on the website of the Brazilian Securities and Exchange Commission (CVM) or the BM&FBOVESPA. The samples used in the study totaled 718, 688, and 722 observations for the value relevance, timeliness, and conditional conservatism models, respectively. The results indicate that different arrangements of the fiscal council and the existence of the audit committee differently impact the accounting information properties. The presence of the fiscal council positively impacted the relevance of equity, while the presence of the audit committee, the relevance of earnings. Conditional conservatism is evidenced in the group of companies with a permanent fiscal council, demonstrating that it is significant as a governance mechanism, rather than the installation for temporary operation when asked by shareholders in an ordinary general meeting. The presence of both showed significant earnings for the market, but they were not timely, something which exposes restriction to the relevance found. Lastly, the powered fiscal council showed a positive association only concerning the relevance of equity.

Rule-Based Budgeting: The Road to Budget Stability1. The Hungarian Solution

Starting from the macro-economic processes of public finance, this article examines the road to reaching financial stability and sustainable economic growth. It outlines the role played by rule-based budgeting in this process. It introduces the regulatory and institutional solutions and explains how, as a logical consequence of being part of a framework, this service can become a useful aspect of financial policy by implementing the respective regulations of the system and of annual budgetary practice. It reaches the conclusion that “elevating” the major stipulations of the rule-based budget framework and the operational rules of the institution safeguarding the implementation into the Fundamental Law of Hungary in 2001 was unavoidable from the aspect of strengthening fiscal responsibility. The article deals with the linkages of the Stability Act, the major characteristics of the work done by the Fiscal Council and the body’s recommendations made in the last few years. Finally, it illustrates with some data the improvement of fiscal (public finance) stability supported by rule-based budgeting.

The Political Economy of Fiscal Transparency and Independent Fiscal Councils

The Political Economy of Fiscal Transparency and Independent Fiscal Councils

The Political Economy of Fiscal Transparency and Independent Fiscal Councils

The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs’ role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are “partisan” and “opportunistic.” If voters only care about policymakers’ competence, both the incumbent and the voters would be better off with an IFC as the debt bias would shrink. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers’ competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are consequently vulnerable to shifts in political conditions.

The Political Economy of Fiscal Transparency and Independent Fiscal Councils

The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs' role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are 'partisan' and 'opportunistic.' If voters only care about policymakers' competence, both the incumbent and the voters would be better off with an IFC as the debt bias would shrink. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers' competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are consequently vulnerable to shifts in political conditions.

Fiscal councils as an element of the concept of fiscal governance in the European Union member states

Fiscal governance is defined as a combination of institutions, rules and norms that structure good governance in the area of fiscal policy. It can be named as the specific mechanism of coordination by using of tools such as: budgetary procedures (legislative fiscal rules), fiscal rules (numerical) and independent fiscal institutions/ fiscal councils. Fiscal governance focuses on how the fiscal policy is planned, approved, conducted and monitored, including the involvement of not only public bodies, but the business sector and civil society too. In this study, particular attention was paid to capturing the essence of the relationship between the qualitative elements of fiscal councils activity and its impact on stabilizing the public finances in the view of fiscal governance concept. During the last world crisis in the EU countries, an interest in establishing fiscal councils has increased. Before 2008 there were only seven institutions in the EU, while in 2014 there are already 19. The question is - are these institutions efficient in stabilizing public finances? Therefore, the main objective of the article is the assessment of the role of the fiscal councils in the coordination of the fiscal policy in the EU Member States. The conducted analysis verifies this role on the basis of theoretical deliberation of the current state of the art. The empirical research verifies fiscal councils’ dependence on fiscal balance of EU countries. Research was conducted on the basis of the European Commission, Eurostat and International Monetary Fund data sets.

Measurement of Fiscal Council Independence in the Countries of the European Union

Measurement of Fiscal Council Independence in the Countries of the European Union

Do European fiscal rules induce a bias in fiscal forecasts? Evidence from the Stability and Growth Pact

Enforcement of European fiscal rules, to a large extent, hinges on fiscal forecasts prepared by the European Commission (EC). The reliability of these forecasts has received little attention in the literature, despite the fact that (i) the forecasts have potentially far-reaching consequences for national governments, especially in the euro area while (ii) the EC depends on information supplied by national officials in preparing its forecasts. We hypothesize that the EC’s forecasts are biased upwards when national governments expect European fiscal rules to bind. Reconstructing this expectation using real-time information, we show that for euro area countries the EC’s fiscal forecasts are indeed biased upwards when the budget deficit threatens to exceed the critical value of 3 % of GDP. For non-euro area countries, which do not face the risk of fines, this bias cannot be established. Our results are robust to various ways of controlling for crisis-induced budgetary problems and the exclusion of various country groups. We offer suggestive evidence that the presence of independent fiscal councils at the national level helps to attenuate the bias induced by the 3 % threshold.

Enhancing the accuracy of fiscal projections in South Africa

The accuracy of the National Treasury's projections of GDP and key fiscal aggregates is comparable to that of the projections of private sector economists, other reputable organisations and the fiscal authorities of other countries. The errors in the projections of the National Treasury have nonetheless been substantial in some years, and have increased from 2000/01 to 2010/11. This paper argues that the credibility of fiscal policy would have been severely tested if the largest annual errors in respect of the various aggregates had coincided. Against this backdrop, the paper makes the case for structured bi-annual discussions of government’s forecasts during public parliamentary hearings as a mechanism for improving the accuracy and credibility of official projections. It also discusses the potential benefits for South Africa of two alternative mechanisms, namely fiscal councils and committees of independent experts.

Fiscal Councils: Rationale and Effectiveness

The paper discusses the effectiveness of independent fiscal institutions - or fiscal councils - in taming the deficit bias that emerged in the 1970s. After a review of the main theoretical arguments and recent trends about fiscal councils, we develop a stylized model showing how a fiscal council can effectively mitigate the deficit bias even though it has no direct lever on the conduct of fiscal policy. We show that the capacity of the fiscal council to improve the public's understanding of the quality of fiscal policy contributes to better align voters and policymakers' incentives and to tame the deficit bias affecting well-intended governments. After mapping the model's key features into a broad set of criteria likely to contribute to the effectiveness of a fiscal council, we use the 2014 vintage of the IMF dataset on independent fiscal institutions to assess whether existing institutions have been built to work.

Fiscal Councils: Rationale and Effectiveness

The paper discusses the effectiveness of independent fiscal institutions—or fiscal councils—in taming the deficit bias that emerged in the 1970s. After a review of the main theoretical arguments and recent trends about fiscal councils, we develop a stylized model showing how a fiscal council can effectively mitigate the deficit bias even though it has no direct lever on the conduct of fiscal policy. We show that the capacity of the fiscal council to improve the public’s understanding of the quality of fiscal policy contributes to better align voters and policymakers’ incentives and to tame the deficit bias affecting well-intended governments. After mapping the model’s key features into a broad set of criteria likely to contribute to the effectiveness of a fiscal council, we use the 2014 vintage of the IMF dataset on independent fiscal institutions to assess whether existing institutions have been built to work.

The structure and trends of public expenditure in the Republic of Serbia

In modern public finance, public expenditure is becoming one of the crucial issues. Public expenditures represent funds which are necessary to finance public needs. The process of determining their optimal level presents a permanent problem for all countries in the global economy. On the one hand, they have to be sufficient to cover all the public needs in order to enable the optimum activities of state, while their overgrowth, on the other hand, can lead to disruption of the necessary balance in public finances of a country. The aim of this paper is to point out the relevance of public expenditures in Serbia and focus on their structure and trends. In more precise terms, this paper is focused on their analysis in the period 2011-2015, whereby the reports and strategies taken into account were received from key institutions for public finance in Serbia, such as the Government of the Republic of Serbia, the Ministry of Finance and the Fiscal Council.

Enhancing the Accuracy of Fiscal Projections in South Africa

The accuracy of the National Treasury's projections of GDP and key fiscal aggregates is comparable to that of the projections of private sector economists, other reputable organisations and the fiscal authorities of other countries. The errors in the projections of the National Treasury have nonetheless been substantial in some years, and have increased from 2000/01 to 2010/11. This paper argues that the credibility of fiscal policy would have been severely tested if the largest annual errors in respect of the various aggregates had coincided. Against this backdrop, the paper makes the case for structured bi-annual discussions of government’s forecasts during public parliamentary hearings as a mechanism for improving the accuracy and credibility of official projections. It also discusses the potential benefits for South Africa of two alternative mechanisms, namely fiscal councils and committees of independent experts.

Fragmented Politics and Public Debt

In this paper, we study the impact of fragmented politics on public debt—in particular, between two consecutive legislative elections. Using data for 92 advanced and developing countries during 1975-2015, we find a positive association between political fragmentation and public debt changes. Corruption magnifies the effects; with higher perceived corruption, political fragmentation has a bigger sway on debt increases. The influence of political fragmentation on debt dynamics is somewhat asymmetric, with larger and more significant effects during periods of debt reduction. Establishment of fiscal councils helps attenuate the negative impact of political fragmentation on public debt dynamics.

Fragmented Politics and Public Debt

In this paper, we study the impact of fragmented politics on public debt—in particular, between two consecutive legislative elections. Using data for 92 advanced and developing countries during 1975-2015, we find a positive association between political fragmentation and public debt changes. Corruption magnifies the effects; with higher perceived corruption, political fragmentation has a bigger sway on debt increases. The influence of political fragmentation on debt dynamics is somewhat asymmetric, with larger and more significant effects during periods of debt reduction. Establishment of fiscal councils helps attenuate the negative impact of political fragmentation on public debt dynamics.

Aspect of fiscal consolidation: Evidence from Serbia

In contemporary market conditions facing continuous debt crisis, the notion of fiscal consolidation is one of potential solutions for solving the main economic issues in any country. As regards fiscal consolidation, it necessary to point out to the importance of developing strategies aimed at minimizing deficit and debt level. Serbia is among those countries in which irrational spending is widely present with unfavourable tendency regarding the aspect of production and consumption. Over the past 25 years, Serbia has spent much more than it has produced, which has led to large budget deficits and debt level. The aim is to point out to the concept of fiscal consolidation and its implementation in Serbia, while the subject of this paper is to present the package of measures and strategies defined by the government of the Republic of Serbia and the Fiscal Council Program.

Empirical evidence on fiscal forecasting in Eurozone countries

Purpose– The purpose of this paper is to contribute to the literature on the determinant factors of government budget balance forecast errors for Eurozone countries based on four different database sources from 1998 to 2011.Design/methodology/approach– Besides the analysis on quality and efficiency of government budget balance projections, panel data analysis is made from different methods taking into account economic, political, institutional and governance factors, and lagged forecast errors for estimations of budget balance forecast errors.Findings– The results show that even with the concern and pressure due to the fiscal crisis in the Eurozone, the bias in fiscal forecasts remains.Originality/value– One contribution of this paper, in comparison to other studies, is the use of longer time periods for the analysis of forecast errors as well as the employment of different data sources for detecting systematic patterns of errors, and the use of various estimation methods for the fiscal forecast error determinants, which gives insights into the reliability and robustness of results obtained in earlier studies. In particular, the introduction of variables such as fiscal council and fiscal rules allows one to check whether institutional behavior may change the effect from debt on fiscal forecast errors.

Corporate Governance improvement in a weak legal system: Brazilian fiscal council

El propósito de este trabajo es evaluar, si en un sistema legal débil, existe algún mecanismo legar para aumentar la vigilancia accionistas sobre la gestión y obtener mejores resultados para ellos. Se utilizó la prueba T para verificar si la media de cada variable analizada presentó diferencias significativas entre empresas con y sin Consejo Fiscal. Encontramos que la existencia de un Consejo Fiscal activo se asocia con un mayor ROE. También se encontró que las empresas con el Consejo Fiscal se involucran mucho menos en earnings management. El Consejo Fiscal es un importante mecanismo de protección de los accionistas y el control permitido por la ley. Es una persona jurídica separada independiente del consejo de administración y de gestión. AbstractThe purpose of this paper is to test, even in a weak legal system, there is any legal mechanism to increase shareholders monitoring over the management and get better results for them. We used the T test to verify if the mean of each analyzed variable has presented significant difference between firms with and without Fiscal Council. We found that the existence of an active Fiscal Council is associated with higher ROE which it improves firm performance. We also found that firms with Fiscal Council engage significantly less in earnings management. The Fiscal Council is an important mechanism of shareholders protection and monitoring allowed by the Law. It a separate corporate body independent of the board of directors and management.

Issues in the Design of Fiscal Policy Rules

Theory suggests that government should smooth taxes and spending, and adjustments in the level of debt should be gradual. Fiscal rules should therefore relate to deficits rather than debt. Rules should also reflect constraints on monetary policy. In normal times, rules should reflect political and institutional considerations, such as the potential for ‘deficit bias’, and the effectiveness of any fiscal council. For example, governments without a history of bias might target deficits five years ahead. However, if interest rates hit the zero lower bound, fiscal and monetary policy coordination is required, and here fiscal councils can also have an important role.

Are Independent Fiscal Institutions Really Independent?

In the last decade the number of independent fiscal institutions (known also as fiscal councils) has tripled. They play an important oversight role over fiscal policy-making in democratic societies, especially as they seek to restore public finance stability in the wake of the recent financial crisis. Although common functions of such institutions include a role in analysis of fiscal policy, forecasting, monitoring compliance with fiscal rules or costing of spending proposals, their roles, resources and structures vary considerably across countries. The aim of the article is to determine the degree of independence of such institutions based on the analysis of the independence index of independent fiscal institutions. The analysis of this index values may be useful to determine the relations between the degree of independence of fiscal councils and fiscal performance of particular countries. The data used to calculate the index values will be derived from European Commission and IMF, which collect sets of information about characteristics of activity of fiscal councils.